According to CNBC, most economists at major financial institutions expect the Fed to begin cutting interest rates sometime this year. However, estimates on the number of rate cuts range from one to four, with most experts suggesting that only time will tell exactly how many times the Fed will lower borrowing costs this year.
“The Fed’s May meeting was largely quiet, with a generally dovish tone. The Fed added a modestly hawkish acknowledgement of ‘slow progress’ on disinflation year-to-date, but Chair Powell delivered a dovish message in his press conference,” Goldman Sachs economist David Mericle wrote in a note to clients.
Amid these mixed signals from the Fed, Goldman Sachs has maintained its forecast for the Fed to cut rates twice this year, by 25 basis points each, with one cut coming in July and the other in November. However, the investment bank cautioned that “even modest upside surprises” in inflation could derail this forecast and cause the Fed to “push out rate cuts further into the future.”
On Wall Street, there has been considerable uncertainty about the timing and magnitude of the Fed’s rate cuts. As of Thursday, interest-rate futures traders were still pricing in just one Fed rate cut for all of 2024, according to data from CME Group.
Citigroup is forecasting four Fed rate cuts this year, but the investment bank’s rationale for the easing is not much different than its counterparts on Wall Street.
Essentially, most economists believe the Fed is right in its assessment that measures of inflation will continue to moderate this year, bringing monetary policymakers closer to their 2% inflation target. The question is how convinced Fed officials need to become and how quickly they will be willing to start cutting rates without appearing to waver in their commitment to price stability.
“Powell’s comments align with our view that the Fed will move to cut rates as soon as core inflation data weakens further or the labor market softens,” Citigroup economist Andrew Hollenhorst wrote in a note to clients.
Hollenhorst sees softer inflation data and a “rapid deterioration” in the jobs market leading the Fed to cut rates in July and follow up with additional reductions, bringing the total amount of easing to a full percentage point by the end of 2024.
Morgan Stanley’s chief U.S. economist, Ellen Zentner, is among the most confident that the Fed will start cutting rates in July, despite inflation running hotter than expected so far this year.
Even though disinflation has stalled and the labor market remains robust, the Fed has “made substantial progress toward the 2% inflation target over the past year. We continue to expect inflation will decline further, the unemployment rate will rise, and the Fed will cut rates three times this year,” Zentner wrote in a note to clients.
Barclays, for its part, believes the Fed won’t start cutting rates until September at the earliest, and that the central bank could grow more hawkish if inflation remains as hot as it was in the first quarter.
Barclays chief U.S. economist Marc Giannoni pointed out that Powell, while signaling that he was done raising rates, stopped short of reiterating his recent expectation that rate cuts were coming sometime this year.
“If inflation comes in stronger than our baseline, the first rate cut could be pushed out to December. This scenario is also roughly as likely as our baseline. In 2025, we forecast four rate cuts,” Giannoni wrote in a note to clients.
Bank of America, meanwhile, believes the Fed will remain on hold until it gets more convincing evidence that inflation is cooling. “The Fed has pivoted to a wait-and-see approach and is prepared to hold the policy rate as long as needed. The Fed’s willingness to take more time implies a delayed start to rate cuts,” Bank of America economist Michael Gapen wrote in a note to clients.
